Key Principles of Utility Tokens

Tokenization is the blockchain-based process that allows for efficient transfer of value over the Internet. Mobility and liquidity ensured by this token concept are what helps connect products and services together. With that, location restrictions can be ignored, and compatibility barriers successfully cleared.

utility tokens

What utility tokens are

Utility tokens are gaining traction and importance in the blockchain system. Essentially, these tokens are blockchain-powered elements having specific capabilities. However, the most noteworthy edge of utility tokens is their universality. They dramatically transform the conventional concepts and create brand-new systems that expand the functions of all the concerned parties.

Utility tokens give their holder a right to participate in the network, i.e. to use it and its services and vote for management and updates. For instance, decentralized Uber tokens can provide a right to ride. ARK tokens, in their turn, enable users to vote for sending a protocol through the Delegated Proof-of-Stake. This is what differs utility tokens from security tokens. Holding the latter, you earn just for the fact of holding them.

Elements of the single system

The function of a certain utility token is determined by the resolution suggested by its parent blockchain. While Uber’s tokens give a right to ride and ARK tokens grant a right to vote, event planning and management blockchain-startup KickCity offers utility tokens that enable event platforms to connect to the blockchain protocols. But what if event platforms such as Eventbrite, Meetup, Ticketmaster embedded blockchain supplemented with the bonus system ensuring efficient marketing? Such systems would allow for selling event tickets beyond the localised areas, powered by the distributed automated bonus system.

Compared to bitcoins and ethers, utility tokens have a critically important mission and generally exist only within a single system. And if bitcoins are a kind of payment or saving method, utility tokens are usually suitable to use within a single platform and address such tasks as goods/service purchases.

Functionality and value

As long as Blockchain is a multi-faceted technology, it makes it adaptive to virtually any human activity. No matter what the token’s task — investment (asset tokens), equity (payment tokens), or utility (utility tokens) — such a token greatly contributes to the crypto platform it serves. This is why tokens can be considered a vital source that supports parent blockchain.

FINMA (Swiss Financial Market Supervisory Authority) has recently presented a 3-type token classification: asset tokens, payment tokens, and utility tokens. This regulator also recognizes hybrid tokens. Basically, utility tokens either grant access to an app or service which can be decentralized, or give a right to contribute to operation within the common single network. A user can book or suspend utility tokens for some conditions — to get some privileges in the system. This will highly incentivise user interactions.

utility token

These tokens do become the crucial part of the growing online systems, as they motivate the participants (including profit organizations) to collectively ensure the integrated set of solutions at the simultaneous use of the single database, user base, and cryptocurrency. As the online systems employ their own unique utility tokens, economic growth implies that the parties will notice how their tokens gain the value as the network grows, and this will enable them to scale their operations and profits. Such a collective stimulation and profit structure is the essence of the distributed model and driver of its network effect.

Beyond their key functions, these tokens can be something like investment or value-transfer instruments. This aspect is based on the demand and supply economy principle. That said, popular and user-attracting platforms may see the market price of their tokens grow. All this describes the fundamental concept of the crypto market speculation, trade, and volatility.

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